Moody's Cuts Credit Ratings of 15 Big Banks

Emmanuel Dunand/Agence France-Presse — Getty ImagesBig banks like Morgan Stanley have been under review by Moody’s since February.

After putting banks on watch four months ago, Moody’s Investors Service on Thursday slashed the credit ratings of 15 large financial firms, in a move that could do lasting damage to their bottom lines and unsettle the markets.

Two United States banks that were hit hard in the financial crisis emerged with the lowest ratings. Citigroup and Bank of America are now rated only two notches above junk. While Morgan Stanley avoided a worst-case scenario of a three-notch downgrade, its rating slipped by two levels.

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” Moody’s global banking managing director Greg Bauer, said in a statement.

Article Tools

• Facebook
• Twitter
• Google+
• Email
• Share
• Print

The downgrades are a serious blow for the banking industry, which is already dealing with the European sovereign debt crisis, a weak American economy and new regulations.

Banks are particularly sensitive to downgrades because they rely on the confidence of creditors and big customers. A lower rating could push up their borrowing costs.

It could also crimp core business, like derivatives. In the face of a downgrade, some customers may choose to transfer their business from the lowest-rated banks to higher-rated ones.

Executives from big banks will now try and convince creditors and large customers that Moody’s has overreacted.

“While Moody’s revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years,” Morgan Stanley said in a press release.

Moody’s downgrades are part of a broad effort to make its analysis more rigorous. The financial crisis stained the reputation of credit rating agencies. Both companies attached high ratings to mortgage-backed bonds that later suffered big losses in the housing bust.

The threat of the downgrade has rippled through the markets for months. Morgan Stanley’s shares are down 25 percent since February 15, when Moody’s first held out the possibility of large downgrades. The cost of insuring against a Morgan Stanley default has risen by 16 percent since then, according Markit, a firm that provides the prices of default swaps.

Before the announcement on Thursday, bank shares continued to fall. Goldman Sachs, Citigroup, Bank of America and Morgan Stanley were all down for the day.

via dealbook.nytimes.com